Apple Filing To Tell All On Options

Published: December 29, 2006

Apple Computer and its charismatic chief executive, Steven P. Jobs, are expected to make a big announcement about a new product at the Macworld conference next month. Before that, however, the company has some other highly anticipated information to share.

The company is likely to answer questions about backdated options granted to Mr. Jobs and other executives in a delayed annual report that Apple said it would file with securities regulators on Friday.

Apple is among dozens of companies, many of them in Silicon Valley, which have come under scrutiny for assigning favorable grant dates to stock options to inflate their value.

So far, Apple, which is known for obsessively guarding information about new products, appears to have applied the same secrecy to its handling of the stock option issues. Publicly, it has confined its response to a few terse statements. This week it continued to maintain its silence as reports about possible falsified documents rattled shareholders.

''What we want a company to do is to get good information in the marketplace as soon as it has that information,'' said Patrick McGurn, executive vice president of Institutional Shareholder Services, which advises its clients on corporate governance issues. ''Obviously the information has dribbled in fits and starts out of Apple. It has been more of a piecemeal approach.''

But Mr. McGurn noted that Apple faced unique challenges.

''Apple is in a much more difficult position than other companies in the backdating morass, because a significant portion of its market valuation is based on Steve Jobs staying at his job,'' he said.

The company has said that Mr. Jobs knew of some backdated grants, but that he did not knowingly receive any of them and had not benefited from the practice.

As part of its annual report, the company will most likely say more about the findings of a three-month investigation it commissioned to look into its accounting for stock options. One former Securities and Exchange Commission official said that if Mr. Jobs signs the document, as he is required to do under Sarbanes-Oxley, and Apple's auditors endorse that signature, it would indicate that the auditors feel he is not in jeopardy.

''The fact that the auditors would accept the Jobs certification reflects that they were satisfied that the internal investigation had been thorough and that the results of the internal report could be relied upon,'' said Michael D. Mann, a partner at the New York law firm of Richards Kibbe & Orbe and a former director of the Office of International Affairs at the S.E.C.

Apple's auditor, KPMG, has been trying to avoid controversy since it reached a deferred-prosecution agreement with the Justice Department last year in a case involving illegal tax shelters. Analysts said that would lead the firm to be particularly vigilant in its auditing of options cases.

James D. Cox, a professor of corporate and securities law at Duke University, said the report could still contain some unpleasant surprises. ''The mere fact that he is producing a report with his signature doesn't mean the report doesn't contain damning information,'' Professor Cox said. ''Assuming the report identifies false documents, does it make clear statements as to who is responsible and, equally, as to who is not responsible, and why?''

The options issues at Apple, which the company first disclosed in June, came back into the spotlight this week when The Recorder, a San Francisco newspaper owned by American Lawyer Media, reported that the investigation conducted by a law firm on Apple's behalf had found that options documents had been falsified to increase the value of grants to Apple executives.

On Thursday, The Financial Times reported that investigators had discovered an options grant to Mr. Jobs that had not been properly authorized by the company's board.

The two reports, which did not name sources, sent shares of Apple on a roller-coaster ride. The shares declined 65 cents, to $80.87 on Thursday, and are down 1.6 percent for the week after falling as low as $76.77 on Wednesday.

A spokesman for Apple, Steve Dowling, said the company planned to meet its target for filing the report, and declined to comment further. ''We're providing all details to the S.E.C. and not commenting,'' Mr. Dowling said.

In an e-mail message, a spokesman for the United States attorney's office in San Francisco, which in July created a special joint task force with the Federal Bureau of Investigation to investigate stock option backdating, declined to comment.

After the review of its options accounting practices, Apple said in October that while there had been 15 instances of backdating, the review had found no misconduct by any member of Apple's current management team.

The language of Apple's statement, coupled with the simultaneous resignation from the board of Fred D. Anderson, the company's former chief financial officer, led analysts to believe that Apple and Mr. Jobs were attempting to distance themselves from any blame in the case.

Analysts have also focused on the possible role of Nancy Heinen, Apple's former general counsel, in the options grants. Ms. Heinen left the company without a public announcement in May and declined to comment on the reason for her departure.

Both Ms. Heinen and Mr. Anderson have retained their own lawyers.

''Nancy Heinen has a well-earned reputation over 20 years for honesty and integrity, and any rumors to the contrary are without foundation,'' said Cristina C. Arguedas, Ms. Heinen's lawyer.

Mr. Anderson's lawyer did not return calls, but an associate of Mr. Anderson's who declined to be identified because of the complexity of the legal situation, said that because of the way the options granting process worked at Apple, it was unlikely that Mr. Anderson would have been in a position to alter option dates.

Although he resigned from the job of chief financial officer in 2004 and went on to help found Elevation Partners, a private equity firm, Mr. Anderson spent time at Apple this year reviewing the options matters before resigning from the board.

Gene Munster, an analyst with Piper Jaffray who follows Apple, said he did not expect the investigations into Apple's options practices to implicate Mr. Jobs, who he said had not historically been involved in compensation issues.

''Everything we know about Apple is that the compensation side is not something Jobs has ever been involved in,'' Mr. Munster said. ''The key thing, and the only thing Wall Street cares about, is whether Jobs will be impacted, and we don't believe he will be.'' Piper Jaffray has an outperform rating on Apple stock.

In a research note on Wednesday, Benjamin Reitzes, an analyst at UBS Investment Research, said there was little to fear.

''Investors seem to be reacting to the mention of Steve Jobs,'' Mr. Reitzes wrote. ''We believe it could make sense to obtain counsel given his immense personal fortune and influence.''